Segmented Trading Markets

75 Pages Posted: 1 Jun 2022 Last revised: 29 Apr 2025

See all articles by Kerry Back

Kerry Back

Rice University - Jesse H. Jones Graduate School of Business

Oguzhan Celebi

Stanford University - Department of Economics

Ali Kakhbod

University of California, Berkeley

A. Max Reppen

Boston University - Questrom School of Business

Date Written: May 1, 2022

Abstract

We study competition among segmented trading venues (fast vs. slow) where traders dynamically choose their venue. Technological improvements in the slower venue raise trading speed, reduce differentiation, and thereby increase trading volume and welfare, while improvements in the faster venue can have an ambiguous effect. Speed enhancements distinctly impact traders based on their sensitivity to execution speed: those with a high willingness to pay or a low willingness to hold benefit most, whereas less speed-sensitive traders face relatively higher transaction fees. Venue choice depends on fees, speeds, and taxes. For example, when the slow venue’s fee rises, traders shift to the fast venue or exit the market depending on their sensitivity to speed. Finally, we show that improving the fast venue’s speed increases total welfare whenever preference shocks occur frequently enough, characterizing when a regulator could design redistributive schemes that leave no stakeholder worse off following a speed improvement. 

Keywords: OTC vs Exchange. Heterogeneous venues. Fragmentation. Competition.

JEL Classification: G12, G2, D4, L13.

Suggested Citation

Back, Kerry and Celebi, Oguzhan and Kakhbod, Ali and Reppen, Anders, Segmented Trading Markets (May 1, 2022). Boston University Questrom School of Business Research Paper No. 4119978, Available at SSRN: https://ssrn.com/abstract=4119978 or http://dx.doi.org/10.2139/ssrn.4119978

Kerry Back

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Oguzhan Celebi

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
STANFORD, CA 94305-6072
United States

Ali Kakhbod (Contact Author)

University of California, Berkeley ( email )

Haas School of Business
2220 Piedmont Ave
Berkeley, CA 94720
United States

Anders Reppen

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

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